PriceSmart : Q2 2021 Earnings Release Conference Call

PriceSmart, Inc. [PSMT]

Second-Quarter Fiscal Year 2021 Earnings Call

Friday, April 9, 2021, 12:00 PM ET

Company Participants:

Michael McCleary; Executive Vice President and Chief Financial Officer

Sherry Bahrambeygui; Chief Executive Officer

Analysts:

Jon Braatz, Kansas City Capital

Rodrigo Echagaray, Scotiabank

Presentation:

Operator: Good afternoon, everyone, and welcome to PriceSmart, Incorporated's Earnings Release Conference Call for the second quarter of fiscal year of 2021, which ended on February 28th 2021.

After remarks from our company's representatives, Ms. Sherry Bahrambeygui, Chief Executive Officer, and Michael McCleary, Chief Financial Officer, you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to one hour and is being recorded today, Friday, April 9, 2021.

A digital replay will be available following the conclusion of today's call through April 16th 2021, by dialing 1-877-344-7529 for domestic callers, or 1-412-317-0088 for international callers, also by entering the replay access code of 10152415.

For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Michael McCleary. Please proceed, sir.

Michael McCleary: Thank you, and welcome to the PriceSmart earnings call for the second quarter of fiscal year 2021. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday afternoon, April 8, 2021. Additionally, we will be talking about our March sales, which we released this morning. You can find all three documents on our Investor Relations website at investors.pricesmart.com where you can also sign up for email alerts.

As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the Company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, will, may, should, estimate and similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, April 9, 2021. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the Company's most recent Annual Report on Form 10-K and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The Company undertakes no obligation to update forward-looking statements made during this call.

Now, I will turn the call over to Sherry Bahrambeygui, PriceSmart's Chief Executive Officer.

Sherry Bahrambeygui: Thank you, Michael, and good day, everyone. We hope you are all healthy and

safe. Thanks for joining us today and for your interest in our company. We will be sharing the strong results from our fiscal second quarter and how we're continuing to build on the momentum we've developed as we cross the midpoint of fiscal 2021.

Our adherence to the founding principles of this company is carried out through a myriad of continuing challenges brought on by COVID and its related effects. We remain vigilant in our unwavering commitment to the safety of our members and employees. The extensive protocols we implemented to provide a safe and healthy environment continue. For instance, we're providing global employees with paid time off for vaccines where and when available. Additionally, we continue to support our employees with bonus opportunities, benefits and enhanced safety measures.

Over the past year, the pandemic has challenged us in many ways. However, I believe it's only strengthened us as a team. It's incredible to watch our team address the short-term challenges while at the same time remaining focused on the long-term objectives we've set for ourselves. We believe we're starting to see the results of some of the changes and enhancements we've made over the past couple of years. Our commitment to The Six Rights of Merchandising continues to be at the core of our business. Our members trust that we're going to have the right merchandise in the right place at the right time in the right quantity in the right condition and at the right price.

Thanks to the dedication of our team and the trust of our members, net merchandise sales grew 3.1% and comparable net merchandise sales grew 1.1% compared to the same 3-month period a year ago. Currency fluctuations negatively impacted net merchandise sales and comparable net merchandise sales by 3.2% and 3%, respectively, for the quarter. Note that we had one less shopping day due to the leap year in February of the prior year.

During the second quarter we saw an uptick of COVID-related restrictions which led to more club days lost compared to the prior sequential quarter. We had 142 club days closed during this holiday quarter versus 51 in the prior sequential quarter. To give you more perspective, we had 225 club days closed in the third quarter of fiscal year 2020, which is from March to May.

Similar to what we saw in the United States, infection rates have risen dramatically in our markets. This brought the return of weekend club closures, restricted hours and reduced traffic, primarily in Panama, which has 7 clubs. But we also experienced similar restrictions in Colombia, where we have 8 clubs, and in some of our Caribbean markets as well.

In addition, we faced sales headwinds due to our decision to reduce the importation of US-sourced merchandise to our Trinidad market, where we have 4 clubs, as a result of the continued US-dollar illiquidity. As expected, this contributed to a decline in sales and membership in that market during the second quarter. Michael will discuss more about that in a few minutes.

Despite these challenges, we continue to provide our members with a great inventory mix and reasons to visit the club. Our hard lines team has built on the momentum we gained from the first quarter and extended that streak into the second quarter. They've done a tremendous job meeting demand and working with our global suppliers to secure inventory. As a result, our hard lines category experienced approximately 8.5% comparable sales growth during the period compared to the prior-year quarter. Leading this growth were business machines, major appliances and electronic departments that grew 183%, 84% and 27%, respectively. Our seafood, produce, cleaning and grocery departments also performed well, with 11%, 7%, 5% and 4% growth, respectively.

As mentioned on previous calls, we continue to make investments in our Direct Farm Program to enhance our offerings of healthier food options for our members. And we're starting to see these investments pay

off. Our produce distribution centers allow us to provide high-quality,farm-to-people produce quicker and more efficiently and to support our local commerce and farming communities. We currently offer a produce distribution center in 3 markets and are actively seeking to expand to other markets as well.

Although our fresh and produce departments did well, we did have challenges during the quarter with our candy, snacks and juices departments in our food category. Also, sales of our housewares and toys categories decreased due to our decision to scale back on long lead time orders based on anticipated shifts in demand because of the pandemic.

Our Click & Go curbside and delivery service represented 3.1% of our net merchandise sales during the quarter. Curbside pickup and delivery is available in all of our clubs and in all markets. During the quarter we introduced the option for our members to select specific dates and windows of time for curbside pickup and delivery, which allows us to operate more efficiently and improve our service and offer greater convenience to our members.

Over the past several months we've seen delivery continue to become a larger portion of our total Click & Go sales. Our grocery, health and beauty and cleaning departments are currently our best performers on the e-commerce platform.

We also continue to expand our mobile app capability. For instance, we recently added the capability for a member to scan our products from their place of work or at home to view availability at surrounding clubs and plan to expand that functionality to enable members to add to their cart.

Our members also continue to respond favorably to our online platform for their membership transactions. 14% of all new signups in the second quarter were completed online. That's up from 11% at the end of the first quarter. Now, some of the important benefits of online signups and renewals is that it provides the opportunity for autorenewal, like a subscription, and auto payment, in addition to capturing high quality, accurate and valuable member information.

Turning to supply chain and inventory, our merchandising team continues to do a great job sourcing inventories, despite continuing shipping container shortages at the point of origin out of Asia. This has caused some time delays with certain departments such as outdoor patio, sporting goods, home furniture, apparel and domestics.

We did a great job optimizing our inventory for the holiday season and, as a result, markdowns and spoilage were significantly less this quarter compared to the same prior-year period. Similar to Q1, there was a higher demand in our non-food categories, particularly electronics. A competitive advantage is that we've been able to source electronics at excellent prices and had good on-hand inventory, while others struggled in this area. We see this as a great opportunity and we've made strategic inventory investments in various non-food departments. So, as a result, our average inventory per club increased slightly versus comparable prior-year quarters.

Our total number of membership accounts decreased 3.6% during the second quarter of fiscal year 2021 when compared to the comparable prior-year period. We attribute that primarily to the restrictions on mobility. However, we saw a 2.4% increase in our membership accounts since August 31, 2020, and in- club traffic continues to improve. Our trailing-12-month renewal rate was 81.5% and 86.2% for the periods ended February 28, 2021 and February 29, 2020, respectively. Colombia experienced the largest percentage decline, followed by Central America and the Caribbean. However, our 81.5% trailing-12- month renewal rate has improved from the low of 80.5% at the end of August as restrictions eased and, as noted previously, we've recently seen an encouraging increase in membership signups and renewals completed online.

We're continuing to enhance the value of our membership through our focus on member wellness. This offering includes healthy foods; our optical centers, with 28 locations open at the end of the quarter and we expect to have over 40 in operation by the end of this fiscal year, up from 17 at the end of fiscal 2020. We also recently opened our first 2 PriceSmart Pharmacies during this calendar year. We'll begin piloting in-club audiology centers as well this year.

Now I'd like to give you a brief update about our real estate and construction activities. We recently began construction of a new warehouse club in Bucaramanga, Colombia that is expected to open in the fall of 2021. This will be our 9th club in Colombia and follows the successful opening of our 8th club, Usaquen, just a few months ago. It will be a smaller-format club. We believe the smaller-format club, coupled with our omnichannel capability, extends our reach and presence in these regional or secondary-city locations and represents a significant way for the Company to grow. Once this club is opened, along with the new club, we expect to open another club in Guatemala and another one in Jamaica this fall and next spring, respectively.

At that point, we will have reached a new Company milestone of 50 warehouse clubs. As I have noted before, new club openings are likely, at least initially, to adversely impact our comparable net merchandise sales. However, we will move forward with new club openings and we believe that, in the long run, such expansion leads to growth by way of incremental membership, growth in net merchandise sales and services, greater leverage and a better shopping experience for our members.

I'd like to spend a moment on our March sales that we released earlier today. March marks the 1-year anniversary from when we began to experience the impact of the COVID-19 pandemic, as well as the month our members began stocking up on merchandise ahead of the uncertainty surrounding the global pandemic. We saw significant sales growth in the month of March last year, with a surge in net sales growth of 17.1% and comparable net merchandise sales growth of 15.7%. As a result, we are comping against a COVID-relatedstock-up phenomena driving high sales growth in March of last year.

Despite the COVID-driven surge in buying in March 2020, our net merchandise sales for March 2021 were up versus last year's sales, coming in at $307.6 million, an increase of 0.5% versus a year ago, with a negative FX impact of 1.5%, or $4.4 million. For the 4 weeks ended March 28, 2021, comparable net merchandise sales decreased 5.9%, with a negative FX impact of 1.4%. We were very pleased with our total sales results in March, which were a historic record for the Company, outside of our holiday-driven December sales.

For us, COVID has illuminated the fact that our fundamental business model, prior investments and commitment to becoming a more critical part of our members' lives is a great value proposition. We will continue to expand our services and continue to provide the best curated selection of merchandise all under one roof. The retail industry is constantly evolving and our members have made it clear that we are among the most responsive. That can make us the retailer of choice in all of our markets. We believe that taking care of our members, our team, our communities and continuing to expand our business in a responsible manner will set us on a continued path for success.

So, to wrap it up, I'm proud of our entire team of over 10,000 employees, whether those working from home or remotely, or our frontline workers in our clubs and distribution centers. We all look forward to continuing to working together to build on the future and expand on what it means to be a PriceSmart member.

Thank you, and I'll now turn the call over to Michael.

Michael McCleary: Thank you, Sherry. Good morning or afternoon to everyone and thanks for joining us

today.

Total revenues and net merchandise sales for the quarter were $937.6 million and $898.4 million, respectively, representing increases of 3.4% and 3.1% over the comparable prior-year period, respectively. As a reminder, including the clubs we opened in Liberia, Costa Rica in June 2020 and Bogota, Colombia in December, 2020, we ended this quarter with 47 warehouse clubs compared to 45 clubs at the end of the second quarter of fiscal 2020. Our comparable net merchandise sales growth was 1.1% for the 13 weeks ended February 28, 2021. Foreign currency fluctuations had a negative impact on both net merchandise and comparable net merchandise sales of approximately $27 million, or 320 basis points, and $26 million, or 300 basis points, respectively.

By segment, in Central America where we had 26 clubs at quarter end, net merchandise sales increased 3.6%, with a 2.4% increase in comparable net merchandise sales. Our Honduras, El Salvador, Guatemala and Nicaragua markets contributed approximately 300 basis points of positive impact to total comparable net merchandise sales. This contribution was partially offset by 140 basis points decrease coming from Panama and Costa Rica, where club closures and currency devaluation contributed to the decreases in sales, respectively.

In the Caribbean region, where we had 13 clubs at quarter end, total net merchandise sales declined 0.6%, but comparable net merchandise sales increased 0.8%. The Dominican Republic continued its stellar sales performance during the COVID-19 pandemic, with double-digit sales growth despite a significant foreign currency devaluation compared to the prior-year period.

In Trinidad, as mentioned on our previous earnings call, we began limiting, temporarily, and in line with our ability to source tradable currencies, U.S. shipments to that market during the first quarter because of the ongoing U.S. dollar illiquidity situation. Our reduction of U.S. shipments has adversely impacted sales in Trinidad but, in line with expectations, comparable net merchandise sales declined 10.7% in the second quarter. We were able to source a modest increase in tradable currencies during the second quarter compared to the first quarter and are working on multiple projects to increase sources of US dollars, such as by exporting goods produced in Trinidad. Therefore, we began increasing our levels of imported merchandise in Trinidad towards the end of our second fiscal quarter. However, we expect similar, albeit slightly moderated, declines in sales in this market going forward until we are able to establish more reliable sources of tradable currencies and, subsequently, more imported goods. While we are in the process of implementing more sustainable sources of US dollars in Trinidad, our exposure to a potential devaluation of the Trinidad dollar may grow.

Moving back to segment sales, in Colombia, where we had 8 clubs open during the quarter, net merchandise sales increased 9.7% and comparable net merchandise sales decreased 4.5%, positively contributing 120 basis points to total net merchandise sales, but negatively impacting total comparable net merchandise sales by approximately 50 basis points. This comparable sales decline in Colombia is primarily attributable to sales transfers from our newly opened warehouse club in Bogota in December of 2020. The impact of currency on total and comparable net merchandise sales in Colombia was significant, at negative 4.3% and 3.8%, respectively, for the quarter. Currency devaluation continues to be a challenge in Colombia, but we are employing different approaches in an effort to mitigate the impacts, such as sourcing of locally produced goods and actively managing our sales prices and foreign currency exposure there.

Turning to gross margins, total gross margin on net merchandise sales came in at 16%, a 130 basis point improvement over the same quarter last year. The 130 basis point increase was primarily driven by the liquidity premium we have priced into our imported merchandise in Trinidad and a result of more focused merchandising strategies and inventory management, resulting in fewer markdowns. Total revenue